We improve SSA programs and operations and protect them against fraud, waste,
and abuse by conducting independent and objective audits, evaluations, and investigations.
We provide timely, useful, and reliable information and advice to Administration
officials, the Congress, and the public.

Authority

The Inspector General Act created independent audit and investigative units,
called the Office of Inspector General (OIG). The mission of the OIG, as spelled
out in the Act, is to:

Conduct and supervise independent and objective audits and investigations
relating to agency programs and operations.

Promote economy, effectiveness,
and efficiency within the agency.

Prevent and detect fraud, waste, and abuse
in agency programs and operations.

Review and make recommendations regarding
existing and proposed legislation and regulations relating to agency programs
and operations.

Keep the agency head and the Congress fully and currently
informed of problems in agency programs and operations.

To ensure objectivity, the IG Act empowers the IG with:

Independence to determine what reviews to perform.

Access to all information
necessary for the reviews.

Authority to publish findings and recommendations
based on the reviews.

Vision

By conducting independent and objective audits, investigations, and evaluations,
we are agents of positive change striving for continuous improvement in the
Social Security Administration's programs, operations, and management and in
our own office.

MEMORANDUM

Our objective was to determine whether beneficiaries who were previously employed
by certain Texas school districts were exempt from Government Pension Offset
(GPO).

BACKGROUND

Under section 218 of the Social Security Act, individuals
employed by State and local governments are not covered by Social Security
unless the government entity has entered into a voluntary agreement with SSA. These
agreements include the provisions, definitions, and conditions required for Social
Security coverage. In addition, Social Security benefits for a spouse or
surviving spouse are generally reduced for individuals who receive a monthly
pension from a State or local government agency. However, this offset did
not apply if an individual’s last day of employment was in a position that
was covered by both Social Security and a State or local government pension plan. The
offset exemption applies only to those individuals whose last day of employment
was before July 1, 2004.The
Social Security Protection Act of 2004 subsequently
amended the GPO provisions to require that State and local government employees
be covered by Social Security throughout their last 60 months (5 years)
of employment to be exempt from GPO.

In October 2005, we received an allegation that approximately 22,000 individuals
who retired from 15 Texas independent school districts before July 1, 2004
may have been improperly exempted from GPO because they did not meet the last
day of employment provision. Specifically, the allegation stated the
22,000 individuals paid the school districts fees to work for 1 day as a non-professional
employee. According to the allegation, the improper exemptions granted
to these individuals will cost the Social Security Trust Fund $2.1 billion.

Although the allegation identified 15 school districts, we limited our review
to the 7 school districts that hired the largest numbers of 1-day workers: West,
Hudson, Lindale, Premont, Coleman, Sweeny and Kilgore. According to the
allegation, these 7 school districts hired approximately 19,000 (86 percent)
of the 22,000 1-day workers (see Appendix B for a discussion of our Scope and
Methodology).

RESULTS OF REVIEW

We found that individuals employed as 1-day workers by the seven Texas school
districts did not appear to meet the requirements to receive a GPO exemption. This
occurred because of the questionable nature of these individuals’ employment. We
also found that five of the school districts did not have the authority to
provide these individuals Social Security coverage.

We identified 20,248 individuals who were employed as 1-day workers by the
7 school districts. Based on our review of a random sample of 665 of
these individuals, we determined that 629 should
not have been exempt from GPO. Projecting our sample results to the
population, we estimate that 19,212 individuals will receive $110 million in
spousal benefits annually to which they may not be entitled. Over their
lifetimes, they will potentially receive about $2.2 billion in spousal benefits
(see Appendix C).

Questionable employment

Our review disclosed that the seven school districts hired 1-day workers primarily
to generate revenue for their districts. Specifically, officials at six
of the school districts stated they would not have hired all the 1-day workers
if they had not collected fees. In addition, we found the number of individuals
hired was primarily based on the number of applications received rather than
an actual need for their services.

Although the individuals hired as 1-day workers were generally paid minimum
wage, they paid fees to the school districts ranging from $100 to $750 each. We
found that the seven school districts collected approximately $7.4 million
in fees from their 1-day workers, while only paying them about $900,000. The
following chart summarizes the total fees collected and the wages paid by the
seven school districts.

Fees Collected
and Wages Paid by Seven Texas School Districts

School District

Number of1-Day Workers

Total Fees Paid to School Districts

Total Wages Paid to 1-Day Workers

West

1,860

$1,069,478

$62,273

Hudson

1,887

493,100

77,744

Lindale

4,313

1,335,205

177,696

Premont

2,186

1,052,035

87,440

Coleman

3,642

699,498

218,520

Sweeny

2,958

1,428,703

121,870

Kilgore

3,402

1,289,215

140,162

TOTAL

20,248

$7,367,234

$885,705

According to school district officials, they used the revenue generated by
their 1-day worker programs to pay the wages of the individuals hired, finance
capital improvements, and pay general expenses. The capital improvements
included resurfacing parking lots; constructing a new nurse’s station;
building and installing new seating and lighting for auditoriums; building
a distance-learning center; and improving the school board’s conference
room.

Significance of GPO Exemption on Spousal Benefits

The GPO provisions only affect Social Security benefits paid to spousal beneficiaries. Specifically,
SSA must reduce spousal benefits for individuals who receive a pension from
a Federal, State or local government based on work where Social Security taxes
were not paid. The spousal benefits are generally reduced by two-thirds
of the government pension amount. The value of a GPO exemption is illustrated
by the following three examples we randomly selected from our sample cases.

Example 1 –An individual who was previously
employed by another school district paid a $250 fee to work on June 18, 2002
in the Kilgore school district. The individual was paid $41.20, from
which $2.55 in Social Security taxes was withheld. The individual filed
for spousal benefits on September 1, 2005, became entitled to benefits at
age 62, and is receiving full spousal benefits of $288.80 with no offset
for their monthly government pension of $2,177.50. The $250 fee the
individual paid was recovered by the value of the GPO exemption for 1 month
of spousal benefits. Had SSA imposed GPO, the monthly spousal benefit
payable would have been reduced to zero.

Example 2 – An individual who was previously employed by
another school district paid a $200 fee to work on June 11, 2002 in the Coleman
school district. The individual was paid $60.00, from which $3.72 in Social
Security taxes was withheld. The individual filed for spousal benefits
on January 15, 2002, became entitled to benefits at age 64, and is receiving
full spousal benefits of $623.60 with no offset for their monthly government
pension of $330.68. The $200 fee the individual paid was recovered by the
value of the GPO exemption for 1 month of spousal benefits. Had SSA
imposed GPO, the monthly spousal benefit payable would have been reduced to
$403.10.

Example 3 – An individual who was previously
employed by another school district paid a $500 fee to work on June 3, 2004
in the Sweeny school district. The individual was paid $41.20, from
which $2.55 in Social Security taxes was withheld. The individual filed
for spousal benefits on September 27, 2004, became entitled to benefits at
age 64, and is receiving full spousal benefits of $235.00 with no offset
for their monthly government pension of $1,052.93. The $500 fee the
individual paid was recovered by the value of the GPO exemption for less
than 3 months of spousal benefits. Had SSA imposed GPO, the monthly
spousal benefit payable would have been reduced to zero.

Five school districts Did Not have authority to provide social security
coverage to 1-day workers

We found that five of the seven
school districts did not have the authority to provide their 1-day workers
Social Security coverage. These five school districts had agreements
with SSA, pursuant to section 218 of the Social Security Act, that
precluded them from providing Social Security coverage to part-time employees. Although
school district officials stated they hired the 1-day workers for full-time
positions, we found there was no intent or expectation by either party that
the employment would last longer than 1 day.

The application packages provided to individuals interested in the 1-day worker
programs at three of the five school districts included letters stating, “In
response to your request, this packet is being mailed to you in order for you
to work your final day in the Texas Teacher Retirement System under the (insert
school district name) as a non‑professional….” The
fourth school district required that applicants submit a resignation letter
before their scheduled day of work. The fifth school district called its 1‑day
worker program the “…one day offset program for Social Security.”

Our review of 475 employees from these 5 school districts disclosed that 450
were hired as 1-day workers. None of these 450 workers worked longer
than 1 day. Since these individuals did not intend to work more than
1 day and, in fact, did not work more than 1 day, they were not in positions
covered by Social Security on their last day of employment. Therefore,
they should not be exempt from GPO.

Details of the seven school districts’ 1-day worker programs

Our review disclosed that the 1-day worker programs at each of the seven school
districts shared many of the same procedures and characteristics. Below
is a general description of how the programs worked.

The interested applicants, usually teachers planning to retire from other
school districts, contacted the hiring school districts and requested application
packages.

The hiring school district sent out application packages requesting the
applicants to return their completed packages along with the application/processing
fees.

The hiring school districts sent out confirmation packages, including a
letter stating that the purpose of the employment was for the applicants
to work their “final day in the Texas Teacher Retirement System.”

The retiring teachers worked 1 day (usually between 6.5 and 8 hours) at
the hiring school district in non-professional positions, usually as janitors
or office clerks.

The individuals were paid between $33 and $60 for their 1 day of employment.

The school districts provided the individuals letters stating they were
employed by the school district in a position covered by Social Security.

The individuals presented these letters to SSA as evidence that they should
be exempt from GPO.

The 1-day worker program at each of the seven school districts is described
below.

West Independent School District

We found that West’s employment of its 1-day workers was questionable. In
addition, we found that West did not have the authority to provide Social Security
coverage to the individuals it employed as 1-day workers because its section
218 agreement precluded it from providing coverage to part-time employees.

Questionable Employment– West required that applicants
pay fees ranging from $500 to $750 to participate in its 1-day worker program. Whereas,
all other individuals West hired did not pay fees. According to West,
it determined the fee amounts based on what other school districts were charging. In
addition, our audit disclosed that the number of 1-day workers West hired was
generally based on the number of interested applicants rather than an actual
need for their services. Finally, West stated it would not have hired
the 1-day workers without collecting application fees.

In total, West collected $1,069,478 in fees from its 1,860 1-day workers. West
deposited the fees into the district’s general fund, which it used to
pay the 1-day workers, cover the cost of processing the applications, and offset
shortfalls in the school district’s finances. West paid the 1,860
1-day workers approximately $62,000. From our sample of 95 individuals,
West had hired 91 as 1-day workers. All 91 of these individuals paid
fees ranging from $500 to $750. They were paid $33 for 1 day of employment.

Lack of Authority to Grant Social Security Coverage - Although
West stated it hired 1-day workers for full-time positions, we found there
was no intent or expectation by either party the employment would last longer
than 1 day. In fact, all 91 individuals hired under the program actually
worked only 1 day. West’s section 218 agreement states that part-time
positions (defined as 30 hours per week or less) are excluded from Social Security
coverage. Our review disclosed that each of the 91 individuals hired
under West’s 1-day program worked less than the required 30 hours per
week.

Hudson Independent School District

Our review disclosed that Hudson’s employment of its 1-day workers was
questionable. In addition, we found that Hudson did not have the authority
to provide Social Security coverage to the individuals it employed as 1-day
workers because its section 218 agreement precluded it from providing coverage
to part-time employees.

Questionable Employment– Hudson required that applicants
pay between $300 and $500 to participate in its 1-day worker program. None
of the other individuals Hudson hired paid fees. In addition, our audit
disclosed that the number of 1-day workers Hudson hired was generally based
on the number of interested applicants rather than an actual need for their
services. According to Hudson, the number of individuals hired was only
limited by the number it could adequately supervise. We found that Hudson
had as many as 210 workers on the same day. Finally, Hudson stated that,
if it had not collected application fees, the school district would only have
hired between 15 and 20 individuals.

In total, Hudson collected approximately $493,000 in fees from its 1,887 1-day
workers. Hudson deposited the fees into the district’s general
fund, which it used to pay the wages of the 1-day workers and a consultant
who was responsible for and completed all necessary personnel actions for hiring
the 1-day workers. According to Hudson, the administrative expense of
its 1-day worker program was $82,475. Hudson used the surplus for capital
improvements, such as resurfacing parking lots and purchasing a modular nurse’s
station. The total wages paid to the 1,887 1-day workers was approximately
$78,000. From our sample of 95 individuals, Hudson had hired 85 as
1-day workers. All 85 of these individuals paid between $300 and $500. They
were paid $41 for 1 day of employment.

Lack of Authority to Grant Social Security Coverage - Although
Hudson stated it hired 1-day workers for full-time positions, we found there
was no intent or expectation by either party the employment would last longer
than 1 day. In fact, all 85 individuals hired under the program only
worked 1 day. Hudson’s section 218 agreement states that part-time
positions (defined as 20 hours per week or less) are excluded from Social Security
coverage. Our review disclosed that each of the 85 individuals hired
under Hudson’s 1-day worker program worked less than the required 20
hours per week.

Lindale Independent School District

Our review disclosed that Lindale’s employment of its 1-day workers
was questionable. In addition, we found that Lindale did not have the
authority to provide Social Security coverage to the individuals it employed
as 1-day workers because its section 218 agreement precluded it from providing
coverage to part-time employees.

Questionable Employment – Lindale required that applicants
pay between $100 and $500 to participate in its 1-day worker program. None
of the other individuals Lindale hired paid fees. In addition, our audit
disclosed that the number of 1-day workers Lindale hired was generally based
on the number of interested applicants rather than an actual need for their
services. According to Lindale, the number of individuals hired was only
limited by the number it could reasonably supervise. Finally, Lindale
stated that, if it had not collected application fees, the school district
would only have hired three or four individuals.

Lindale collected $1,335,205 in fees from its 4,313 1-day workers. Lindale
deposited the fees into the district’s general fund, which it used to
pay the wages of the 1-day workers and cover the administrative expense of
hiring these individuals. Lindale officials stated it used the surplus
to “improve fund balance” and pay for other general expenditures. The
4,313 1-day workers were paid approximately $178,000. From our sample
of 95 individuals, Lindale had hired 90 as 1-day workers. All these
individuals paid fees ranging from $100 to $500. They were all paid $41
for 1 day of employment.

Lack of Authority to Grant Social Security Coverage - Although
Lindale stated it hired 1-day workers to fill full-time positions, we found
there was no intent or expectation by either party that the employment would
last longer than 1 day. In fact, all 90 individuals hired under
the program actually worked only 1 day. Lindale’s section 218 agreement
states that part-time positions are excluded from Social Security coverage. Our
review disclosed that each of the 90 individuals hired under the school district’s
1‑day worker program worked 8 hours or less.

Premont Independent School District

We found that Premont’s employment of its 1-day workers was questionable. In
addition, we found that Premont did not have the authority to provide Social
Security coverage to the individuals it employed as 1-day workers because its
section 218 agreement precluded it from providing coverage to part-time employees.

Questionable Employment – Premont required that applicants
pay $500 to participate in its 1-day worker program. None of the other
individuals Premont hired paid fees. In addition, we found the number
of 1-day workers Premont hired was generally based on the number of interested
applicants rather than an actual need for their services. We found that
Premont had as many as 502 workers on the same day. Finally, Premont
stated that, if it had not collected application fees, the school district
would not have hired any 1-day workers because they did not have the funds
to pay their wages.

In total, Premont collected $1,052,035 in fees from its 2,186 1-day workers. Premont
deposited the fees into the district’s general fund, which it used to
pay the wages of the 1-day workers and cover the administrative expense of
hiring them. Premont officials stated it used the surplus to fund capital
improvements in the district. For example, Premont used the surplus
to refurbish the seating and lighting in an auditorium, remodel a storage building
into a distance-learning center, and upgrade air conditioning systems. The
2,186 1-day workers were paid approximately $87,000. From our sample
of 95 individuals, Premont had hired 90 as 1-day workers, who paid fees
of $500 each. They were all paid $40 for 1 day of employment.

Lack of Authority to Grant Social Security Coverage - Although
Premont stated it hired 1-day workers to fill full-time positions, we found
there was no intent or expectation by either party the employment would last
longer than 1 day. In fact, all 90 individuals hired under the program
actually worked only 1 day. Premont’s section 218 agreement states
that part-time positions (defined as 20 hours or less per week) are excluded
from Social Security coverage. We found that each of the 90 individuals
hired under Premont’s 1-day worker program worked less than the required
20 hours per week.

Coleman Independent School District

We found that Coleman’s employment of its 1-day workers was questionable. In
addition, we found that Coleman did not have the authority to provide Social
Security coverage to the individuals it employed as 1-day workers because its
section 218 agreement precluded it from providing coverage to part-time employees.

Questionable Employment – Coleman required that applicants
pay between $100 and $300 in fees to participate in its 1-day worker program. Although
the school district required that all new employees pay fees, Coleman held the
checks and
returned them to the individuals who worked more than 30 days. However,
Coleman immediately deposited the checks from its 1-day workers into its general
fund.

In total, Coleman collected $699,498 in fees from its 3,642 1-day workers. Coleman
deposited the fees into the district’s general fund, which was used to
pay its operating expenses, including the wages paid to its 1-day workers. The
3,642 1-day workers were paid approximately $218,000. From our sample
of 95 individuals, Coleman had hired 94 as 1-day workers. All 94 of these
individuals paid between $100 and $300 in fees. They were all paid $60
for their 1 day of employment.

Lack of Authority to Grant Social Security Coverage - Although
Coleman stated it hired its 1-day workers to fill full-time positions, we found
there was no intent or expectation by either party the employment would last
longer than 1 day. In fact, all 94 individuals hired under the program
actually worked only 1 day. Coleman’s section 218 agreement states
that part-time positions are excluded from Social Security coverage. Our
review disclosed that each of the individuals hired under Coleman’s 1‑day
worker program worked 8 hours or less.

Sweeny Independent
School District

Our review disclosed that the employment between Sweeny and its 1-day workers
was questionable. Sweeny required that 1-day worker applicants “donate” $500
to the Sweeny Education Foundation (Foundation). The Foundation is a
nonprofit organization that transfers funds into Sweeny’s general fund
as needed. In addition to the $500 “donation,” the 1-day
worker applicants paid a consultant $200 to process their applications. Other
individuals Sweeny hired neither donated to the Foundation nor paid a consultant
$200 to process their applications. We also found the number of 1‑day
workers Sweeny hired was generally based on the number of interested applicants
rather than an actual need for their services. We found that Sweeny had
as many as 374 workers on the same
day. Finally, Sweeny stated that, if it had not collected the $500 “donation,” the
school district would have only hired between 10 and 15 individuals.

In total, Sweeny collected $1,428,703 in fees from its 2,958 1-day workers. These
1-day workers were paid approximately $122,000. From our sample of 95
individuals, Sweeny had hired 92 as 1-day workers. All 92 of these individuals
made a “donation” of $500 to the Foundation. They were all
paid $41 for their 1 day of employment.

Kilgore Independent School District

We found that Kilgore’s employment of its 1-day workers was questionable. Kilgore
required that applicants pay between $250 and $500 in fees to participate in
its 1-day worker program. None of the other individuals Kilgore hired paid
fees. In addition, we found the number of 1-day workers Kilgore hired was
generally based on the number of interested applicants rather than an actual
need for their services. According to Kilgore, the number of individuals
hired was only limited by the number it could reasonably supervise. We
found that Kilgore had as many as 97 workers on the same day. Finally,
Kilgore stated if it had not collected application fees, the school district
would not have hired any 1-day workers.

In total, Kilgore collected $1,289,215 in fees from its 3,402 1-day workers. Kilgore
deposited the fees into its general fund, which it used to pay the wages of
the 1-day workers and cover the administrative expense of hiring these individuals. These
1-day workers were paid approximately $140,000. From our sample of 95
individuals, Kilgore hired 87 as 1-day workers. We found that 86 of these
individuals paid between $250 and $500 in fees (1 of the 87 individuals
was not required to pay a fee because she was a Kilgore employee). All
87 individuals were paid $41 for their 1 day of employment.

SSA may have improPerly GRANTED GPO Exemptions to 1-day workers

SSA needs to revise its policies and procedures concerning acceptable proof
and evidence for the last day of employment exemption for GPO. Specifically,
we found that, of the 665 individuals
in our sample, 170 were receiving spousal benefits. SSA exempted 168
of them from GPO. Generally, this occurred because SSA relied solely
on documentation provided by the 1-day workers to determine whether they should
be exempt from GPO. This documentation included pay stubs and letters
addressed to SSA from the school districts stating the individual was employed
in a position covered by both the Texas Teachers Retirement System and Social
Security on their final day of employment. According to SSA policy, this
documentation is considered acceptable evidence that a GPO exemption applies. However,
our review of the practices at the seven Texas Independent School Districts
found that relying solely on this documentation does not provide SSA sufficient
information to determine whether it should exempt an individual from GPO. To
determine whether an individual should be exempt from GPO, SSA needs to examine
the terms and conditions of the employment and the school district’s
section 218 agreement.

Additional 1-day worker programs

The allegation we received in October 2005 identified 8 other Texas school districts that
hired approximately 3,285 1-day workers. If the same conditions we found
at the 7 school districts we reviewed occurred in these 8 school districts,
about 3,107 of these individuals should not be exempt from GPO. Furthermore,
we estimate these 3,107 individuals will receive approximately $17.8 million
in spousal benefits annually to
which they may not be entitled. Over their lifetimes, they could receive
about $353 million in spousal benefits.

Our audit disclosed that the 1-day worker programs were generally limited
to State and local government entities in Texas. To determine the extent
to which this could be occurring in other States, we reviewed SSA’s payment
records. This review identified all spousal beneficiaries for whom SSA
noted the State of the pension payments and who were exempt from GPO based
on the last day of employment provision. According to SSA’s Master
Beneficiary Record, 1,303 spouses are exempt from GPO based on the last day
of employment provision. Of these 1,303 individuals, 1,276 (98 percent)
had been employed by a State or local government entity in Texas. We
estimate 995 of the 1,276 individuals
were from the 15 Texas school districts (see Appendix C).

CONCLUSIONS AND RECOMMENDATIONS

We found the employment agreements between the seven Texas school districts
and their 1-day workers were questionable. In addition, five of the school
districts did not have the authority to provide these individuals Social Security
coverage. Our review disclosed that the school districts hired the 1-day
workers primarily to generate revenue. The individuals hired as 1-day
workers paid fees far in excess of any wages received. However, we believe
these individuals paid these fees based on an expectation that they would be
provided an exemption from GPO. On average, the GPO exemption is valued
at approximately $113,000 per person over the average life expectancy of an
individual receiving spousal benefits.

Unless SSA changes its policies and procedures for evaluating individuals
who are eligible for GPO exemptions, we estimate 19,212 individuals will receive
$110 million in spousal benefits annually to which they may not be entitled. Over
their lifetimes, these individuals could cost the Social Security Trust Funds
about $2.2 billion. In addition, we estimate 3,107 individuals at 8 other
Texas schools districts could improperly receive $17.8 million in spousal benefits. Over
their lifetimes, they could receive $353 million in spousal benefits.

We recommend that SSA:

Develop policies and procedures to ensure individuals employed as 1-day
workers only receive GPO exemptions if appropriate. For example, SSA
should obtain documentation to evaluate whether the terms and conditions
of the employment are valid and whether the school district’s Social
Security coverage complies with its section 218 agreement.

Reexamine the
decisions to grant an exemption from GPO for the 168 spouses in our sample

Identify
and reexamine any decisions to grant exemptions from GPO for spouses in the
population of 20,248 1-day workers employed by the 7 school districts

Review
the 1-day worker programs at the other eight Texas independent school districts
identified in the allegation to determine whether their 1-day workers programs
would result in inappropriate GPO exemptions.

AGENCY COMMENTS

SSA agreed, in part, with our recommendations. Specifically, SSA stated
it would ensure that appropriate section 218 agreements are in force for the
school districts and take appropriate action if it identified any problems.

Regarding the questionable employment, SSA stated the payment of a fee does
not affect the validity of the wages unless the fee is considered a reimbursement
of wages paid to the worker. SSA further stated it has no evidence these
fees were considered a reimbursement of wages, nor does the draft OIG report
state this is the case.

Regarding Social Security coverage for part-time employees, SSA agreed that
many part-time positions are not covered under section 218 agreements. However,
SSA stated it generally looks to the employers to determine whether the position
is full- or part-time. SSA stated that, in all our cases, the school
districts paid the Social Security taxes, which demonstrated that the school
districts determined the positions were full‑time and, therefore, covered
under the section 218 agreements.

See Appendix D for the full text of SSA’s comments.

OIG RESPONSE

We are pleased that SSA agreed, in part, with our recommendations. However,
we have the following observations.

With respect to the employment questioned in our report, we found substantial
evidence that SSA needs to review the employment relationship for the very
reasons SSA cited. Most notable, the fees were, in substance, a return
or reimbursement of the wages paid. We noted in several instances in
our report that the school districts did not have the funds to pay the wages
or would not have hired these individuals without charging a fee. As
such, we believe the fees were a reimbursement of wages paid.

With respect
to the Social Security coverage for part-time employees, we believe SSA should
not rely on these school districts to determine whether the positions were
covered by Social Security simply because they paid Social Security taxes.

Rather, SSA should examine the facts and circumstances of the employment
at each school district as we outlined in our report, to determine whether
the employment is full- or part-time and covered under the section 218 agreements.

We also believe SSA’s review needs to consider that these employment
practices primarily occurred in these 15 school districts. As we noted,
we estimate 995 of the 1,303 individuals nationwide who are exempt from GPO
under the last day of employment provision were from these 15 school districts. These
school districts almost exclusively hired individuals from other school districts
rather than individuals from their own school district. Of the 665 individuals
in our sample, 649 (97.6 percent) had not been previously employed by
the hiring school district.

Patrick P. O’Carroll, Jr.

APPENDICES

APPENDIX A – Acronyms

APPENDIX B – Scope and Methodology

APPENDIX C – Sampling Methodology and Results

APPENDIX D – Agency Comments

APPENDIX E – OIG Contacts and Staff Acknowledgments

Appendix A -

Acronyms

Act

Social Security Act

Foundation

Sweeny Education Foundation

GPO

Government Pension Offset

MEF

Master Earnings File

OIG

Office of the Inspector General

POMS

Program Operations Manual System

Pub. L. No.

Public Law Number

SSA

Social Security Administration

U.S.C.

United States Code

Appendix B --

Scope and Methodology

We obtained a data extract from the Master Earnings File (MEF) of individuals
for whom the seven school districts had
reported earnings of $100 or less between
January 1, 2001 and June 30, 2004. In addition, we obtained lists from
six of the school districts that
contained identifying information about individuals who participated in their
1-day worker programs. Using the data extract and information provided
by the school districts, we identified a population of 20,248 individuals who
likely participated in 1‑day worker programs during our audit period. From
this population, we randomly selected a sample of 665 individuals (95 from
each school district) for review.

To accomplish our objective, we

reviewed the applicable sections of the Social Security Act (Act),
U.S. Code, and Social Security Administration’s (SSA) Program Operations
Manual System;

interviewed SSA employees from the Dallas Regional Office, Office of Income
Security Programs and Office of General Counsel;

interviewed officials from the following school districts: West,
Hudson, Lindale, Premont, Coleman, Sweeny and Kilgore;

reviewed policies and other documentation related to the 1-day worker programs
at the 7 school districts; and

extracted a random sample of 665 individuals who participated in the 1-day
worker programs of the 7 school districts (95 individuals in each district). For
each sampled individual we obtained employment information from the school
districts and queries from SSA’s MEF and Master Beneficiary Record.

We determined whether the computer-processed data were sufficiently reliable
for our intended use. We conducted tests to determine the completeness
and accuracy of the data. These tests allowed us to assess the reliability
of the data and achieve our audit objectives.

Our audit was primarily a compliance review and therefore our review of internal
controls was limited to assessing SSA’s policies and procedures concerning
acceptable evidence to support the last day of employment exemption for GPO. We
did not review the internal controls in each of the seven school districts
because it was not necessary to achieve our objective.

We performed audit work related to the seven school districts in the cities
of West, Lufkin, Lindale, Premont, Coleman, Sweeny and Kilgore, Texas and Richmond,
California, between December 2005 and August 2006. The entity audited
was SSA’s Office of Operations under the Deputy Commissioner for Operations. We
conducted our audit in accordance with generally accepted government auditing
standards.

Appendix C -- Sampling Methodology and Results

Sample of 1-day workers - We obtained a data extract from
the Master Earnings File (MEF) of individuals for whom the seven school districts reported
earnings of $100 or less between January 1, 2001 and June 30, 2004. In
addition, we obtained lists from six of the school districts that
contained identifying information about individuals who had participated in
their 1-day worker programs. Using the data extract and information provided
by the school districts, we identified a population of 20,248 individuals who
likely participated in 1-day worker programs during our audit period. The
following table includes the number of individuals per school district.

School
District

Individuals in
the 1-Day Worker Programs

West

1,860

Hudson

1,887

Lindale

4,313

Premont

2,186

Coleman

3,642

Sweeny

2,958

Kilgore

3,402

Total

20,248

We randomly selected 665 individuals, 95 individuals from each school district,
for review. For each sampled individual, we obtained employment information
from the school districts to determine whether the employment was valid and
whether the school districts had the authority (per their section 218 agreements)
to provide Social Security coverage to the individual.

Of the 665 individuals in our sample, we found 629 (95 percent) should not
be exempt from GPO based on the last day of employment provision. Projecting
our sample results to the population, we estimate that 19,212 individuals will
receive $110 million in spousal benefits annually to which they may not
be entitled. Over their lifetimes, they will potentially receive about
$2.2 billion in spousal benefits. The following tables provide the details
of our sample results and statistical projections.

Table 1 – Number of Individuals Who May Not Be Eligible for
GPO Exemptions

School District

SampleSize

Ineligible
Individuals

Population

Point Estimate

Lower
Limit

Upper
Limit

West

95

91

1,860

1,782

Hudson

95

85

1,887

1,688

Lindale

95

90

4,313

4,086

Premont

95

90

2,186

2,071

Coleman

95

94

3,642

3,604

Sweeny

95

92

2,958

2,865

Kilgore

95

87

3,402

3,116

Totals

665

629

20,248

19,212

18,925

19,497

All statistical projections are at the 90-percent confidence level.

Table 2 – Annual Estimate of Spousal Benefits Paid to Individuals
Who May Not Be Eligible for GPO Exemptions

School District

Point Estimate

Average Annual
Spousal Benefits

AnnualEstimate

West

1,782

$5,736

$10,221,552

Hudson

1,688

$5,736

$9,682,368

Lindale

4,086

$5,736

$23,437,296

Premont

2,071

$5,736

$11,879,256

Coleman

3,604

$5,736

$20,672,544

Sweeny

2,865

$5,736

$16,433,640

Kilgore

3,116

$5,736

$17,873,376

Totals

19,212

$5,736

$110,200,032

Table 3 – Lifetime Estimate of Spousal Benefits Paid to Individuals
Who May Not Be Eligible for GPO Exemptions

School District

Point
Estimate

Average Annual
Spousal Benefits

Average Life
Expectancy at Age 62

Spousal Benefits
Paid Over Lifetime

West

1,782

$5,736

19.82

$202,591,161

Hudson

1,688

$5,736

19.82

$191,904,534

Lindale

4,086

$5,736

19.82

$464,527,207

Premont

2,071

$5,736

19.82

$235,446,854

Coleman

3,604

$5,736

19.82

$409,729,822

Sweeny

2,865

$5,736

19.82

$325,714,745

Kilgore

3,116

$5,736

19.82

$354,250,312

Totals

19,212

$5,736

19.82

$2,184,164,635

Estimate of Additional 1-Day Workers at Remaining Texas School Districts
Identified in the Allegation – Our sample results at the
7 school districts found that 629 of 665 individuals (95 percent)
who participated in the 1-day worker program may not be eligible for a
GPO exemption. We applied this percentage to the 3,285 individuals
identified in the allegation for the remaining 8 school districts and estimate
an additional 3,107 individuals should not be exempt from GPO. These
3,107 individuals would receive about $17.8 million annually and $353 million
over their lifetimes. The following table provides the details of
our estimate.

Sample of Spousal Beneficiaries Currently Exempt from GPO – We
obtained a data extract from SSA’s Master Beneficiary Record of all spousal
beneficiaries for whom SSA identified the State of the pension payments and
who are exempt from GPO based on the last day of employment provision. From
this, we identified a population of 1,303 spouses, of which 1,276 were
previously employed by a State or local government entity in Texas. From
the 1,276 individuals, we randomly selected 100 for review and found that 78
were previously employed by the 15 Texas school districts. Projecting
our sample results to our population, we estimate that 995 individuals were
previously employed by the 15 Texas school districts. These school districts
almost exclusively hired individuals from other school districts rather than
individuals from their own school district. Of the 665 individuals in
our sample, 649 (97.6 percent) had not been previously employed by the
hiring school district. The following tables provide the details of our
sampling results and statistical projections.

We appreciate OIG’s efforts in conducting this review. Our comments
on the draft report content and recommendations are attached.

Let me know if we can be of further assistance. Staff inquiries may
be directed to
Ms. Candace Skurnik, Director, Audit Management and Liaison Staff, at extension
54636.

Attachment:
SSA Response

COMMENTS ON THE OFFICE OF THE INSPECTOR GENERAL (OIG) DRAFT REPORT, “GOVERNMENT
PENSION OFFSET EXEMPTION FOR TEXAS SCHOOL DISTRICTS’ EMPLOYEES” (A-09-06-26086)

Thank you for the opportunity to review and provide comments on this draft
report.

The Government Pension Offset (GPO) reduces Social Security spousal benefits
by two-thirds of the amount of the government pension. Prior to July
1, 2004, Social Security beneficiaries could be exempt from GPO if, on “the
last day” of employment, they were in a position covered by both Social
Security and the government pension plan. To meet this exemption, some
Texas Teacher’s Retirement System (TRS) participants who had worked their
careers in employment not covered by Social Security, transferred to a position
that was covered by both TRS and Social Security just prior to retirement,
often for only one day of employment. When this application of the last
day test came to the attention of Congress, the Social Security Administration
(SSA) advised that, while questionable from a public policy perspective, the
application was legally supported. Congress ended the last day test in
the Social Security Protection Act (SSPA), substituting a requirement that
an individual work his or her last 60-months in covered employment in order
to be eligible for the GPO exemption.

The draft OIG report indicates that SSA misapplied the law by affording the “last
day” exemption to certain Texas TRS participants who paid a fee and worked
their last day of employment in other school districts in positions for which
Social Security taxes were paid. However, the legislative history of
the SSPA clearly indicates that Congress knew how SSA was interpreting the
law and administering the “last day” exemption. Moreover,
the fact that Congress felt compelled to take legislative action to end the
practice indicates that it recognized the limits of the Agency’s discretion
under the former statutory language. This issue was raised to Congress
in an August 2002 Government Accountability Office (GAO) report entitled “Social
Security Administration: Revision to the Government Pension Offset Should be
Considered.” That report acknowledged that individuals who paid
a fee to obtain their one-day job in Social Security covered employment met
the requirements for the “last day” exemption to the GPO provision
as SSA was administering the provision. This report had no findings,
either stated or implied, that indicated that SSA was not properly applying
the “last day” exemption. In fact, the report concluded
that, to address the issue of potential abuses resulting from the “last
day” exemption, Congress needed to consider revising the Social Security
Act to extend the requirement for covered employment for a longer period of
time.

The Committee on Ways and Means report on the 2004 legislation that ended
the “last day” exemption to the GPO cites GAO testimony that the
exemption “allows a select group of individuals with a relatively small
investment of work time and only minimal Social Security contributions to gain
access to potentially many years of full Social Security spousal benefits.” This
testimony, as well as GAO’s 2002 report, led to thorough investigations
by Congress and SSA. Congressional interest in this issue was evidenced
by a hearing that was held in May 2003.

The issue of whether the “last day” exemption to GPO should be
retained or substantially modified was debated on the floor of the House of
Representatives. Views on both sides of the issue were expressed -- that
is, that the “last day” exemption should be retained and, alternatively,
that this exemption was a loophole that was both costly and inappropriate. Throughout
the time GAO was reporting to Congress, SSA was simultaneously communicating
and working with members of the Social Security Subcommittee to seek a legislative
change and to correct the loophole. Ultimately, Congress determined that
legislation was necessary to close the loophole. The final legislation
(section 418 of the SSPA) replaced the “last day” exemption with
a requirement that, to be exempt from GPO, the individual must work in employment
covered by Social Security for at least 60 months before retirement from a
State or local government job.

In developing our existing policy, we reviewed (1) whether a bona fide employment
relationship existed, even though teachers paid a processing fee that in many
cases exceeded the wages they expected to earn; and (2) whether teachers employed
for as little as one day met the requirements of those section 218 agreements
that specifically exclude employees in part-time positions from Social Security
coverage.

Section 210(j)(2) of the Social Security Act defines an employee as “… any
individual who, under the usual common law rules applicable in determining
the employer-employee relationship, has that status of an employee.” Pursuant
to 20 CFR 404.1007(a), a common-law relationship exists if the employer can
tell the employee “what to do and how, when, and where to do it;” i.e.,
the employer controls the employee’s work. The fact that some workers
paid the employer a fee for processing their job applications did not change
the fact that the employer controlled the conditions of employment. As
an employer, the school district could designate when and where the employees
worked, in what position they worked, could withhold pay for nonperformance,
and could fire them. As a result, we determined that the common law test
was met and an employment relationship existed, regardless of whether a fee
had been paid

The fact that a worker pays a fee to work does not impact the validity of
the wages received or the underlying employee-employer relationship, as long
as the fee is not considered a reimbursement of wages paid to the worker. We
have no evidence of any of these fees being considered as such, nor does the
draft OIG report state that this is the case.

With regard to the part-time status issue, it is true that many part-time positions
are not covered under section 218 agreements in Texas. However, it is also
true that full-time positions exist that may be filled on a part-time basis. In
evaluating whether a position is covered under a section 218 agreement in Texas,
it is the status of the position, not the status of the person who
fills it, that is the determining factor. For example, if the position
is one requiring a 40-hour workweek, individuals filling that position would
have Social Security coverage, even if the position is filled by five individuals
each working eight hours. Conversely, if the position requires a 20-hour
work week and part-time positions are not covered by the section 218 agreement,
then the individuals in that position would not be covered by Social Security
whether it is five individuals each

working four hours or one individual working 20 hours. We generally
look to the employer to determine the position to which the employee
was assigned and whether Social Security taxes are payable. In all of
these cases, the employer paid the Social Security taxes, demonstrating its
determination that the positions being filled were full-time positions and,
hence, covered under the section 218 agreement.

In addition, pension contributions for this work were made to the Texas Teachers
Retirement System for these employees. Based on our understanding of
the applicable pension rules, the contributions would not have been made had
these employees been working in temporary (part-time) positions.

In the past, OIG has been supportive of SSA’s implementation of the “last
day” exemption to the GPO. Specifically, in response to an inquiry
about the validity of one-day employment in one of the school districts, OIG
noted that it was within SSA’s purview to determine whether a bona fide
employment relationship existed and indicated that additional work by OIG would
be redundant in light of the work done by SSA and GAO, along with the elimination
of the one-day test. It is not clear why OIG’s views on this matter
have changed.

Our responses to the specific recommendations are provided below:

Recommendation 1

SSA should develop policies and procedures to ensure individuals employed
as one-day workers only receive GPO exemptions if appropriate. For example,
SSA should obtain documentation to evaluate whether the terms and conditions
of the employment are valid and whether the school district’s Social
Security coverage complies with its section
218 agreement.

Response

We agree in part with this recommendation. Our policies regarding the “last
day” exemption to the GPO are based on the applicable statute in effect
before enactment of the Social Security Protection Act of 2004. These
policies are appropriate and have been reviewed and approved by our Office
of General Counsel. However, we agree to check to ensure that an appropriate
section 218 agreement is in force for the school district.

Recommendation 2

SSA should reexamine the decisions to grant an exemption from GPO for the
168 spouses in our sample.

Response

We agree to review the section 218 agreement for the seven school districts
where the 168 spouses worked and, if we identify problems in this review, we
will take appropriate action.

Recommendation 3

SSA should identify and reexamine any decisions to grant exemptions from GPO
for spouses in the population of 20,248 one-day workers employed by the seven
school districts.

Response

As stated in the response to recommendation 2, we agree to review the section
218 agreements for these seven school districts and, if we identify problems
in this review, we will take appropriate action.

Recommendation 4

SSA should review the one-day worker programs at the other eight Texas independent
school districts identified in the allegation to determine whether their one-day
workers programs would result in inappropriate GPO exemptions.

Response

We agree to review the section 218 agreements for the other eight school districts
identified in the OIG review and, if we identify problems in this review, we
will take appropriate action.

Appendix E --
OIG Contacts and Staff Acknowledgments

OIG Contacts

For additional copies of this report, please visit our web site at www.socialsecurity.gov/oig or
contact the Office of the Inspector General’s Public Affairs Specialist
at (410) 965‑3218. Refer to Common Identification Number
A‑09‑06‑26086.

DISTRIBUTION SCHEDULE

Commissioner of Social Security
Office of Management and Budget, Income Maintenance Branch
Chairman and Ranking Member, Committee on Ways and Means
Chief of Staff, Committee on Ways and Means
Chairman and Ranking Minority Member, Subcommittee on Social Security
Majority and Minority Staff Director, Subcommittee on Social Security
Chairman and Ranking Minority Member, Subcommittee on Human Resources
Chairman and Ranking Minority Member, Committee on Budget, House of Representatives
Chairman and Ranking Minority Member, Committee on Government Reform and Oversight
Chairman and Ranking Minority Member, Committee on Governmental Affairs
Chairman and Ranking Minority Member, Committee on Appropriations, House of Representatives
Chairman and Ranking Minority, Subcommittee on Labor, Health and Human Services,
Education and Related Agencies, Committee on Appropriations,
House of Representatives
Chairman and Ranking Minority Member, Committee on Appropriations, U.S. Senate
Chairman and Ranking Minority Member, Subcommittee on Labor, Health and Human
Services, Education and Related Agencies, Committee on Appropriations, U.S. Senate
Chairman and Ranking Minority Member, Committee on Finance
Chairman and Ranking Minority Member, Subcommittee on Social Security and Family
Policy
Chairman and Ranking Minority Member, Senate Special Committee on Aging
Social Security Advisory Board

Overview of the Office of the Inspector General
The Office of the Inspector General (OIG) is comprised of our Office of Investigations
(OI), Office of Audit (OA), Office of the Chief Counsel to the Inspector
General (OCCIG), and Office of Resource Management (ORM). To ensure
compliance with policies and procedures, internal controls, and professional
standards, we also have a comprehensive Professional Responsibility and Quality
Assurance program.

Office of Audit
OA conducts and/or supervises financial and performance audits of the Social
Security Administration’s (SSA) programs and operations and makes recommendations
to ensure program objectives are achieved effectively and efficiently. Financial
audits assess whether SSA’s financial statements fairly present SSA’s
financial position, results of operations, and cash flow. Performance
audits review the economy, efficiency, and effectiveness of SSA’s programs
and operations. OA also conducts short-term management and program evaluations
and projects on issues of concern to SSA, Congress, and the general public.

Office of Investigations
OI conducts and coordinates investigative activity related to fraud, waste,
abuse, and mismanagement in SSA programs and operations. This includes
wrongdoing by applicants, beneficiaries, contractors, third parties, or SSA
employees performing their official duties. This office serves as OIG
liaison to the Department of Justice on all matters relating to the investigations
of SSA programs and personnel. OI also conducts joint investigations
with other Federal, State, and local law enforcement agencies.

Office of the Chief Counsel to the Inspector General
OCCIG provides independent legal advice and counsel to the IG on various matters,
including statutes, regulations, legislation, and policy directives. OCCIG
also advises the IG on investigative procedures and techniques, as well as
on legal implications and conclusions to be drawn from audit and investigative
material. Finally, OCCIG administers the Civil Monetary Penalty program.

Office of Resource Management
ORM supports OIG by providing information resource management and systems security. ORM
also coordinates OIG’s budget, procurement, telecommunications, facilities,
and human resources. In addition, ORM is the focal point for OIG’s
strategic planning function and the development and implementation of performance
measures required by the Government Performance and Results Act of 1993.